BI cuts key lending rate to 10.25%

Urip Hudiono, The Jakarta Post - 2006-11-08 15:33:46

Jakarta, November 8, 2006 (JP) - Bank Indonesia trimmed its key interest rate by half a percentage point Tuesday to bring it down to 10.25 percent, encouraged by the continuing easing of inflation.

Tuesday's widely forecast rate cut is the fourth of its size since August, following two quarter-point cuts in May and July. The central bank's key rate stood at 12.75 percent at the beginning of the year.

The latest cut is in line with falling inflation, with the economy having recently shaken off the lingering effects of last year's fuel price hike. The inflation rate stood at 6.29 percent in the year to October, compared with double-digit levels during the first months of the year.

The country's economy, badly hit by runaway inflation early this year, has been showing signs of a strong recovery in recent months. The economy grew by 5.3 percent in this year's second quarter as compared to 4.6 percent in the first three months.

BI's Board of Governors said in a statement that the main rationale for the rate cut was the need to encourage higher growth amid the room provided by slowing inflation, particularly with signs of continuing macroeconomic improvements entering the fourth quarter.

The rupiah's recent stability had also supported the rate cut.

Forex analyst Farial Anwar, from Currency Asset Management, said the interest-rate cut would not affect the rupiah's stability as there was still a large spread between the U.S. Federal Reserve's current 5.25 percent rate and rupiah-based bonds.

"The cut in the rate will not cause an outflow of foreign funds. Even if there is an outflow from the forex market, it will be compensated for by in inflows to the recently bullish stock market," he predicted.

BI's latest rate cut certainly kept the markets bubbling, with the rupiah rising to Rp 9,123 per U.S. dollar, and the Jakarta Stock Exchange closing 0.8 percent up at a new record high of 1,654.152.

BI admitted, however, that there could still be a time lag before the banks lowered their lending rates, depending on each bank's policy.

Nevertheless, Jahja Setiaatmadja, the vice president of Bank Central Asia (BCA), the country's third largest lender by assets, said that his bank would lower its lending rates by half a percentage point to some 15 percent on Nov. 15.

Meanwhile, Bank Mandiri spokesperson Mansyur Nasution said that the country's largest lender would also evaluate its lending rates, having reduced them to 13.5 percent for corporate loans and 15 percent for consumer loans.

Industrialists have called for lending rates to come down to 12 percent so as to encourage expansion by the real sector and help increase consumer spending.